Russia-China: The Rapprochement Continues

According to the Chinese press, Vladimir Putin’s visit to the People’s Republic of China was «short but productive». The leaders of the two countries focussed on trade and economic relations, but it stands to reason that any summit meetings between Russia and China always have a geopolitical significance as well.

It is not difficult to understand the two leaders’ preoccupation with economic issues. The decline in world prices for raw materials and especially for oil that began in the latter half of 2014 led to a reduction in world trade in 2015, which fell by nearly 13 percent. In their reports, WTO experts are currently choosing to overemphasise world trade estimates in goods, the «growth» of which, according to these experts, remained «sluggish» in 2015. However, this growth turned into a slump in trade volumes in the first quarter of 2016. World trade in commercial services also fell in 2015 (by 6.4 percent), which naturally reduces confidence somewhat in the word «growth».

The growth crisis in world trade has affected everyone involved, and has been particularly devastating for oil and raw material exporting countries.

China, however, continued to increase its presence in foreign markets in 2015 and its share in world exports rose to 13.6 percent (from 12.3 percent in 2014). China’s share in world merchandise imports dropped to 10 percent (from 10.3 percent), but China became the leader in terms of service import growth (with an increase of almost 15 percent).

The drop in trade between China and Russia in 2015 proved to be less severe than the decline in Russia’s foreign trade as a whole. As a result, China’s role as Russia’s trade partner has grown, while Russia’s role as China’s trade partner has decreased (this is currently around 1.5 percent for Chinese exports and 2 percent for imports). These figures roughly correspond to Russia’s share of global imports and exports today.

So is it necessary to boost trade exchanges, bringing them up to the same level as declared previously and securing high-level relations at the political level or consistently bottomless potential? I am not sure.

Firstly, as the statistics for the first few months of 2016 show, there is already a trend towards restoring the quantitative indicators of trade between Russia and China. While Chinese exports fell by 7.6 percent between January and April, exports to Russia increased by 4.4 percent. Chinese imports as a whole fell by 12.8 percent, but imports from Russia only fell by 2.8 percent.

Secondly, there are also some encouraging developments in trade patterns: Chinese consumers, for example, have clearly developed a taste for Russian food products. The share of these products in Russian exports to the prospective market increased to 7.4 percent in the first quarter of 2016 and the volume of supplies exceeded half a billion dollars. The share of machinery and equipment in Russian exports also increased, from 2 percent in 2015 to 4 percent in the first quarter of 2016.

Thirdly, the numerous formats of bilateral cooperation that have emerged during Russia’s turn to the East may yield practical results in the very near future.

And finally, it is time to start distinguishing between extensive and intensive foreign trade growth.

Traditionally, the importance of foreign trade for Russia’s economic growth is overestimated. Conversely, when it comes to import diversification (which we often mistakenly narrow import substitution down to), including machinery and equipment, the current and future possibilities of China are underestimated.

It should be noted that unlike many other countries, China is persistently moving towards the creation of a relatively independent technological and industrial structure, is continuing to reduce its purchase of foreign equipment (its imports from the EU fell by 15 percent in 2015) and its involvement in global value chains and so on.

There are often complaints regarding the lack of Chinese investment in Russia, but these are not completely justified.

As of the end of 2015, Russia had amassed nearly $9 billion in direct investments from China, the total for the year amounting to $560 million – 6.7 percent less than the previous year. Russia invested $13 million in China (-8 percent), bringing the accumulated amount to nearly $950 million.

Thus Chinese direct investment in Russia (around 1 percent of the total amount of investment, including Hong Kong as the largest recipient) is currently comparable with investments in other countries – both commodity-dependent and industrialised. Only the US, Australia and the UK far exceed Russia in terms of the amount of direct investment from China.

There are also prospects for an increase in Chinese investment in Russia. The fact is that there has been a structural and institutional restructuring of capital exports from China in recent years. Private capital is playing a growing role among investors (more than 40 percent compared with 10 percent in 2010), while foreign fuel and raw materials are losing their appeal. The bulk of foreign investment is currently through mergers and acquisitions and the Chinese are particularly active in the acquisition of companies with modern technologies, well-known brands and information services. Investment in real estate, the acquisition of agricultural land and so on is also popular.

The ‘Belt and Road’ megaproject and its link with the EEU gives additional grounds for optimism. There has already been a noticeable increase in the activity of Chinese investors in the Volga region as part of the megaproject, particularly where the local business environment is favourable to manufacturers.

There have been fairly authoritative statements in the Chinese press regarding China’s interest in strengthening Russia. It seems that the resumption of economic growth is the only important prerequisite for attracting serious interest from Chinese investors. Here, however, uncertainty reigns for the moment. Perhaps the time has come to identify and discuss ways out of the situation.